Wasting economic credibility

STANFORD – Gone are the days when politicians considered credibility their most precious asset. From presidents and prime ministers down, economic policy makers have entered territory that exceeds the familiar realm of political hype, and are increasingly disconnected from voters’ notions of reality.

This phenomenon admits a multitude of explanations. First, today’s communicative environment favors extreme statements, rather than cold, dispassionate, and empirically-based analysis. In a polarized society, politicians are more interested in reaffirming the support of their more radical sympathizers than in proposing moderation or finding middle ground.

Second, sometimes forecasts are made that turn out badly. Talking about “temporary inflation” was reasonable at first, but as the months went by it became more and more debatable, which is partly due to the fact that the meaning of the term is not the same for the common people as it is for economists. For the average voter, transitory is something that will go away in no time, and this description does not correspond to a problem that not only persisted but worsened.

The famous American baseball player Yogi Berra once observed that making predictions is very difficult, especially when it comes to the future. And even a description of current conditions can end badly, as economic data sometimes has to undergo substantial revisions.

Third, politicians hate being the bearer of bad news, preferring to blame their adversaries or some political counterpart like the gas industry for their problems. Every time gasoline becomes more expensive, the left assures that it is the result of an iniquitous conspiracy by local producers. But to my knowledge, no such conspiracy has ever been found. The OPEC cartel may try to take advantage of market swings, but the price at the gas station ultimately depends on the forces of supply and demand.

The inability to see this fact is a reflection of widespread economic illiteracy, which is the fourth reason for the current situation. Voters generally have limited time and capacity to absorb apparent subtleties such as the difference between “high” and “rising,” “net” and “gross,” or “short-term” and “long-term,” not to mention understanding probabilities. . And politicians (unlike economists) tend not to pay much attention to nuance.

Take the case of inflation. From the point of view of economists, statistical offices, central banks, and finance ministries, inflation means that prices are rising. But for the common people, inflation means that the prices are too high for the personal budget. Suppose that the 6.8% year-on-year increase in the US consumer price index fell to zero over the next 12 months. Many people would still think that inflation is not yet under control, because previous price increases have not been reversed.

Or consider the definition of recession by economists and statistical offices. Technicalities aside, recession means the economy is in contraction; For this reason, the simplified rule of considering that there is a recession is used when the economy registers negative real growth (adjusted for inflation) for two consecutive quarters. In other words, a recession ends as soon as the economy begins to grow again. But for the uninitiated, a recession doesn’t end until the good times return and the abundant supply of jobs. That is why slow economic recoveries are problematic for rulers.

Another common cause of confusion is the difference between gross and net. A good example is the claim (often exaggerated) that imposing and subsidizing the use of solar and wind energy to achieve an accelerated energy transition will create millions of jobs in a short time. But no one talks about the jobs that will be lost in the fossil fuel sector. The argument in question highlights the gross result without taking into account the net effect.

Another example is the budget gimmicks that hide the true costs of initiatives like US President Joe Biden’s Build Back Better project. To fit as many “progressive” policies as possible into a $ 1.75 trillion budget framework over 10 years, it is assumed that many of the benefits will be time-limited, so a program that will last one, three, or six years will be paid with the additional tax collection of the 10 years.

But in reality, no one believes that these programs expire on the specified date. As President Ronald Reagan said, “There is nothing more durable than a temporary public program.” So when the Congressional Budget Office evaluated the fiscal cost assuming that the BBB project programs will last 10 years, the total climbed to almost $ 5 trillion, of which $ 3 trillion would add to the already large debt. national.

But the budget tricks are not exclusive to Democrats. When David Stockman, Reagan’s budget director, saw that he was unable to cut spending enough to comply with the law that required a fiscal balance forecast in a certain number of years, he appealed to include the famous magic asterisk: “spending cuts that are they will decide later ”.

Other differences of interpretation arise in relation to the short term and the long term. Economists measure the short term in quarters or at most one or two years; But for most people, short term means weeks, or at most a couple of months.

Increasingly pressured by rising inflation, Biden often repeats the thesis of some leading economists who claim that the BBB project will reduce inflation. The argument would be that subsidies for child care expenses, family leave, etc., will allow more parents to work. It is a debatable empirical statement. But even if it were true, the argument depends on what happens to inflation in the next few years, not the next few weeks or months. It would be absurd to claim that a massive increase in public spending will reduce inflation in the short term in an economy that is already close to full employment. No wonder the latest polls show that people aren’t buying it.

All politicians are under pressure to circumvent the laws of economics or even arithmetic (as Biden has done, stating that his project will cost nothing). But whatever temporary advantages they get from that tactic, sooner or later the resulting erosion of credibility takes its toll. And this usually happens when they most need the support of people. As my friend George P. Shultz used to say: “The legal tender is trust.”

* The author is Professor of Economics at Stanford University and a Senior Fellow at the Hoover Institution. He was chairman of the Council of Economic Advisers to George HW Bush, from 1989 to 1993, and headed the so-called Boskin Commission, an advisory body to Congress that highlighted errors in the official estimates of inflation in the United States.


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